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FCF yield vs earnings yield

FCF yield is unlevered free cash flow over market cap. On $55,000,000 of FCF and $1,100,000,000 of cap it is 5 percent. Earnings yield is profit over price. A $50 share on $2.50 of EPS is also 5 percent, on a different firm.

 FCF yieldEarnings yield
FormulaUnlevered FCF / market cap.EPS / price, or earnings / market cap.
Teaching sheet$55,000,000 over $1,100,000,000 is 5 percent.A $50 share on $2.50 of EPS is 5 percent on $5,000,000,000 of cap and $250,000,000 of earnings.
When the cap halvesHold FCF at $55,000,000, cut the cap to $550,000,000: the yield rises to 10 percent. The cash did not rise.Hold the $50 price and raise EPS to $5. Earnings yield rises to 10 percent. That is still the P/E sheet.
The same 5 percent, a larger firm$70,000,000 of FCF on $1,400,000,000 of market cap is 5 percent again.The P/E sheet's 5 percent is $250,000,000 over $5,000,000,000. Do not paste that cap onto the $55,000,000 of FCF.
What it is notA dividend. Plenty of firms print a 5 percent FCF yield and pay none of it out.Cash. Earnings are an accounting profit. A firm can earn and still consume cash.
On this page

Cash the operations produced, against profit over price

FCF yield is unlevered free cash flow divided by market capitalisation:

FCF yield=Unlevered FCFMarket cap\text{FCF yield} = \frac{\text{Unlevered FCF}}{\text{Market cap}}

On $55,000,000 of unlevered FCF against $1,100,000,000 of market cap that is 5 percent. The $55,000,000 is the teaching-bridge cash from how free cash flow works. This page divides that cash.

Earnings yield is a different firm. A $50 share on $2.50 of EPS, with 100,000,000 shares, is a P/E of 20 and a 5 percent earnings yield on $5,000,000,000 of market cap and $250,000,000 of earnings. Do not paste that $5,000,000,000 cap onto the $55,000,000 of FCF.

How FCF yield works owns this 5 percent. How earnings yield works owns the other 5 percent. They share a family name. They do not share a dollar stack. A yield quoted without naming the cash in the numerator is not a number anyone can use.

A higher yield can be a smaller cap, not more cash

Keep FCF at $55,000,000. Cut market cap to $550,000,000. Yield is 10 percent. The cash did not move. The denominator did. Distressed names print a huge FCF yield when the price collapses faster than trailing FCF.

The third FCF sheet matches the first sheet's 5 percent on a larger pile: $70,000,000 of FCF on $1,400,000,000 of market cap. The 5 percent hides scale. Put the dollars back in before lining two names up.

On the P/E sheet, hold the $50 price and raise EPS to $5. Earnings yield rises to 10 percent on $500,000,000 of earnings. That 10 percent is still profit over price, not this cash rate. This is educational material, not financial advice.

Worked examples

5 percent on \$55,000,000 of FCF

Unlevered free cash flow is $55,000,000. Market cap is $1,100,000,000. What is FCF yield?

  1. FCF yield is FCF over market cap: 55000000/1100000000=0.0555000000 / 1100000000 = 0.05.
  2. That is 5 percent.

FCF yield is 5 percent. Unlevered FCF is $55,000,000. Market cap is $1,100,000,000.

10 percent on a \$550,000,000 cap

Keep FCF at $55,000,000. Market cap is now $550,000,000. What is the yield?

  1. FCF yield: 55000000/550000000=0.155000000 / 550000000 = 0.1.
  2. That is 10 percent. The cash did not change. The cap halved.

FCF yield is 10 percent. FCF is still $55,000,000. Market cap is $550,000,000.

5 percent on \$70,000,000 of FCF

Unlevered FCF is $70,000,000. Market cap is $1,400,000,000. What is FCF yield?

  1. FCF yield: 70000000/1400000000=0.0570000000 / 1400000000 = 0.05.
  2. That is 5 percent, matching the first sheet on a larger cash pile and a larger cap.

FCF yield is 5 percent. FCF is $70,000,000. Market cap is $1,400,000,000.

5 percent earnings yield on the P/E sheet

The share price is $50, EPS is $2.50, and 100,000,000 shares are outstanding. What is earnings yield?

  1. P/E is price over EPS: 50/2.50=2050 / 2.50 = 20.
  2. Market cap: 50×100000000=500000000050 \times 100000000 = 5000000000, so $5,000,000,000.
  3. Total earnings: 2.50×100000000=2500000002.50 \times 100000000 = 250000000, so $250,000,000.
  4. Earnings yield is 1/20=0.051 / 20 = 0.05, 5 percent, or $250,000,000 over $5,000,000,000.

P/E is 20. Earnings yield is 5 percent. Market cap is $5,000,000,000. Earnings are $250,000,000. This is not the $55,000,000 FCF firm.

10 percent earnings yield on \$5 of EPS

Keep the $50 price and 100,000,000 shares. EPS is now $5. What is earnings yield?

  1. P/E: 50/5=1050 / 5 = 10.
  2. Market cap is still $5,000,000,000.
  3. Total earnings: 5×100000000=5000000005 \times 100000000 = 500000000, so $500,000,000.
  4. Earnings yield is 1/10=0.101 / 10 = 0.10, 10 percent.

P/E falls to 10. Earnings yield rises to 10 percent. Earnings are $500,000,000. Still the P/E sheet, not the FCF sheet.

Common questions

Is FCF yield the same as earnings yield?

No. FCF yield is unlevered free cash flow over market cap. Earnings yield is profit over price. The first FCF sheet's 5 percent is $55,000,000 over $1,100,000,000. The P/E sheet's 5 percent is $250,000,000 over $5,000,000,000. Same family name, two firms.

Is a higher FCF yield better?

Not on its own. The second sheet's 10 percent is the same $55,000,000 of cash on a $550,000,000 cap. The cash did not improve. The denominator shrank.

Why unlevered FCF over market cap?

Because that is the teaching convention on this page: firm-side cash over the equity cap. EV in the denominator would match the cash to the operations. Type the cap your sheet is using.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.